OPEC hands a multi-billion dollar bonanza to India

India's crude oil import bill, which was $112.74 billion in 2014-15, could see a drastic fall this year.

December 8, 2015 12:50 IST

The Organisation of Petroleum Exporting Countries (OPEC) last Friday handed over a bonanza to India, when the 13-member cartel decided not to cut back crude oil production.

The OPEC decision is set to bring more relief than the 22% reduction in India's crude oil import bill, which was $112.74 billion last financial year for buying 189.43 million tonnes.

The 22% estimate was in June this year, which said that falling crude oil prices in the global market would reduce India's oil import bill to $88 billion.

But with prices consistently falling for the Indian crude oil basket from $59.07 per barrel in April to $42.40 in November this year, the savings could be much more as the trend of declining prices is expected to continue in the near future, thanks to the OPEC.

The cartel produces about 40% of the world's crude oil and currently estimated to produce about 32 million barrels per day, more than its earlier target of 30 million barrels.

The impact was felt on US oil prices that plunged 6% on Monday to $37.65 a barrel on the New York Mercantile Exchange, a seven- year low.

"Crude oil prices were no doubt compressed by the lack of an agreement at the OPEC, signaling that the supply glut will persist longer," said analyst Bernard Aw at IG Markets in Singapore, reported PTI.

With the cartel postponing a decision on production to June next year, the respite is for a fairly longer period, during which Iran entering the crude oil market in a big way could further change the price and output dynamics.

Benefits for India

The fact that India will be paying less to import crude oil will also have a positive effect on India's trade deficit, at a time when exports are on a decline.

It may be recalled exports fell for the 11th straight month in October, a matter of concern since they account for about a fourth of India's $2.1 trillion gross domestic product. Thankfully, falling crude oil prices resulted in a 45% reduction year-on-year in October.

The overall impact on the trade deficit, despite falling exports, resulted in the trade deficit narrowing to $9.8 billion in the first half of the current fiscal, down from $11.3 billion in the corresponding period last fiscal. The NDA government will be able to manage its finances better and remain committed to fiscal consolidation.

A lower import bill will reduce the demand for the dollar and offset at least partially the expected flight of capital resulting from FII selling if the US Fed decides to hike interest rate at its meeting on 15 and 16 December. For a large part of November, financial institutional investors (FIIs) were on a selling spree on Indian stock markets.

The result will be a relatively stronger, stable rupee, better foreign exchange reserves.

Industries that would gain

Falling crude oil prices have a beneficial effect on aviation, paint and tyre companies. While aviation firms tend to benefit from a fall in prices of aviation turbine fuel that account for about 40% of their operating costs, paint and tyre companies also gain as they consume many oil derivatives and intermediary products, resulting in lower operating costs.